Why applications are still Microsoft’s biggest asset in the cloud

Microsoft is putting on the cloud computing full-court press this week, complete with appearances by CEO Satya Nadella on CNBC and at a press event in San Francisco on Monday. There’s a lot of talk about the scale of its cloud platform, and about its ability to serve hyperscale, enterprise and hybrid cloud environments. But scale alone, or even the biggest and best virtual servers around, won’t make or break Microsoft in the cloud: applications will.

It’s not that scale isn’t important, but it’s just a game that Microsoft has to prove it can play. When Nadella and cloud boss Scott Guthrie talk about Microsoft’s 19 data center regions, $4.5 billion in annual infrastructure spending and millions of servers under management (with current capacity to house about 10 million, if need be), they’re not talking about anything [company]Google[/company] or [company]Amazon Web Services[/company] can’t do or aren’t already doing. They’re really saying, “See, three can play at this game.”

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Frankly, if the name of the game is just building out capacity in a race to host the most virtual servers at the lowest price, it’s not clear Microsoft can win, or that it would even want to. That’s only a defensible position for so long, until someone or something comes along to pull the rug out from under it like cloud computing did to the server business. The coronation as the “Dell, HP or IBM of the Cloud” is not exactly an honor Microsoft, Google or Amazon are fighting to claim.

But if you look a little below the surface, Microsoft’s real strength as a cloud provider begins to stand out: its software. It still sells a lot of it, which is what makes its hybrid cloud and enterprise cloud stories (“hyperscale” cloud is the third leg of the cloud-messaging trifecta the company has been pushing lately) so compelling. By making Azure play nice with current customers’ SQL Server, Windows Server and Active Directory environments, Microsoft has ensured there’s a very large installed base predisposed to give Azure a serious look.

Microsoft doesn’t even have to cling to the past in order to keep legitimate the enterprise software business it has spent decades building. On Monday, the company announced a new appliance called Cloud Systems Platform that’s essentially the entire suite of Azure services and features preinstalled on Dell hardware and ready to run inside customers’ data centers. Four years after Microsoft first floated the idea, Azure is now officially a cloud platform and a new software product to sell.

Nadella encapsulated the idea during his speech at Monday’s event, stating that when Microsoft says “mobile-first,” it means “the mobility of the the individual experience.” Finally, after years of talking about it, Microsoft under Nadella seems serious about delivering a single experience regardless where that software is running, or whatever that experience might be.

However, systems software is secondary to Microsoft’s primary software assets, which are still its applications. Microsoft went on the offensive — and risked coming across as petty (or, worse, unfunny) — against Google with the “Scroogled” campaign because Google’s line of collaboration and productivity services are a significant threat to a multibillion-dollar business Microsoft enjoys. A big reason the company is able to claim that 80 percent of the Fortune 500 is running on the Microsoft cloud, that its cloud brings in $4.4 billion in revenue per year, and that it’s storing 30 trillion objects in Azure Storage is that Bing, Office 365 and Xbox Live all run on Azure.

Google has the same sort of cycle in place, mind you, with the data it generates in search and its experience building web infrastructure leading to everything from Google Now to the rather impressive BigQuery, but it’s still playing catchup to Microsoft when it comes to getting its products used by those lucrative corporate customers.

Even when Microsoft announced its new Azure Marketplace on Monday — a service designed to cater to software vendors in the cloud much like Windows did on the desktop — I found myself most impressed with the promise offered up by Microsoft’s own applications. A live demonstration highlighted the ease with which Azure users can now deploy a Hadoop cluster running Cloudera’s software, but that’s not too novel considering Cloudera just launched last week a product to enable the same thing on the AWS cloud. And that Microsoft already offers its own Hadoop service called HDInsight and a tight partnership with Cloudera rival Hortonworks.

The part where Cloudera’s Mike Olson queried the company’s Impala SQL-on-Hadoop engine using a natural language interface in Excel — now that was something! Being able to query data in Excel, just by typing simple queries, could be a lot bigger factor in the deployment of new Azure instances running Hadoop than might be the fact that it’s now easier to do.

So, yeah, scale does matter in cloud computing and it does matter to Microsoft, but not just for the sake of running the most virtual servers at the lowest margins, or being the place where all the hot startups want to be. AWS and Google are going to win those fights, it’s in their DNA.

Microsoft knows how to build commercial software and how to sell it. VMware under Paul Maritz (a former Microsoft executive himself) made a short-lived play to load up on applications and become the Microsoft of the cloud, but it didn’t have the clout, the experience or the fortitude to carry through on it. If Microsoft is going to be the one legacy IT vendor that remains relevant in the decade to come, it’s going to be because it figures out how to do what it does at cloud scale.